With credit tight, and consumers and businesses looking for some cash leverage, lending clubs – social networks that connect investors and borrowers – are becoming increasingly prominent. Here’s the straight skinny on peer-to-peer lenders, along with a blueprint on how to get a decent loan out of one.
OK, so what’s peer-to-peer lending? Basically, it involves membership-based clubs, stocked with supposedly eager lenders who are willing to make loans to borrowers for a decent return on their “investment”.
The market is dominated by online peer-to-peer lending sites like Lending Club and Prosper.com that match individual borrowers to individual lenders – typically for loan deals that are only a few thousand dollars, presumably below the attention span – or level of interest – for banks.
Here’s a description of how social lending Web sites work (from LendingClub.com):
- “Social lending networks bring together investors and creditworthy borrowers to offer value beyond traditional banks.”
- “Borrowers with good credit can get personal loans from $1,000 to $25,000 at interest rates that are often significantly
- better than rates from conventional sources.”
- “For lenders, money invested goes immediately to the lending network’s approved borrower members. Most lender members spread their investment across tens or hundreds of qualified borrowers. Notes (that correspond to specific borrower loans) are offered only by means of a prospectus.”
Borrowers must have decent credit – the 640-and-up credit score at Prosper.com seems to be at the low-end while the average Lending Club borrower has an average credit score of 713 – and lenders usually garner better-than-market rate yields on their loans (9% annual returns are not uncommon for peer-to-peer investors).
To get a loan, sign up at a site like Prosper or Lending Club and expect to disclose some pertinent financial information. These sites want to know your debt-to-income ration (under 25% is good, minus your mortgage); any problems paying bills (no delinquencies is a plus), and any outstanding tax liens or bankruptcies in your past – things like that.
Typically, you won’t pay an application fee, but you will be placed into a slot, i.e., graded for credit risk, with a processing fee of up to 3.75% of the loan if you’re approved, depending on that grade.
Typically, borrowers usually qualify for loans in the $1,000-$2,500 range, although loans of up to $25,000 are available for creditworthy customers. Interest rates are below bank industry averages, Lending Club claims, although that’s not saying much given the 15%-20% rates on credit cards and 10% rates on car loans at big banks these days.
Should you use a social networking lender? Well, they’re easy to use and do offer rates that are several percentage points below what the big banks are offering. Most loans don’t have pre-payment penalties, either.
On the downside, it’s not always easy qualifying – you really need decent credit – and no big bank is behind the loan, and that might cause consternation among nervous borrowers who like the big bank brand.
But if nothing else, getting ordinary people to cut loan deals together does strike a blow against the arrogance and near-monopoly of mega-banks.
In fact, that might be the biggest benefit of all.
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